With banking, retail in doldrums, Indian IT to post muted Q2 results

The banking vertical has been weak for many and structural challenges in retail will hamper growth,” Kawaljeet Saluja, analyst at Kotak Institutional Equities, said in a note.Jochelle Mendonca | ET Bureau | October 05, 2017, 09:08 IST

Indian IT companies are likely to report another quarter of muted results, with Infosys widely expected to cut its full-year guidance, as clients in retail and banking and financial services continue to curtail their IT spends. Muted growth is now a familiar story for the sector, which is struggling with structural changes to the way it does business and is being battered by protectionist moves in its major markets. “Organic constant currency growth for tier 1 IT will be weak, in the range of 0.9-2.3% quarterover-quarter.

The banking vertical has been weak for many and structural challenges in retail will hamper growth,” Kawaljeet Saluja, analyst at Kotak Institutional Equities, said in a note. IT companies had expected that IT spending in the banking sector would return in the second quarter. But executives from Cognizant and Infosys have said the rebound has not occurred.

A slew of bankruptcies in the retail space, including that of TCS client Toys-R-Us, is also muting demand in what tends to be the second largest vertical for Indian IT companies. Saluja expects Infosys, TCS, HCL Tech and Wipro to report organic constant currency growth of 2.3%, 2.1%, 2.1% and 0.9%, respectively.

IT margins will be helped by favourable currency movements, though the impact of wage hikes will kick in from this quarter for companies, other than TCS. IT companies, excluding TCS, have delayed their wage hikes this year. Even though analysts expect Infosys to beat some of its peers in growth, they also expect the company to cut its guidance for the year.

Infosys had forecast constant currency revenue growth of 6.5-8.5% for FY18. Kotak and ICICI Securities expect the company to cut its growth target to 6-7%. HSBC analysts expect the company to cut the top end of its guidance in dollar terms to 8.6%.

Infosys had forecast growth of 7.1-9.1% in reported currency terms. Even more importantly for the Bengaluru-headquartered firm will be details on its CEO search and any strategy changes it will look to put in place after the contentious exit for former CEO Vishal Sikka. Co-founder Nandan Nilekani, who returned to the company as chairman, had promised that the results in October would come with details on the company’s strategy.

“This quarter, Infosys’ numbers will be incidental to everything else. If they are getting rid of people-+software, who will the CEO be, will there be even more exits after a CEO is appointed. The market has already factored in a guidance cut but any future rating has to depend on what they say,” an analyst with a Mumbai-based brokerage said.

He declined to be identified. Also in the spotlight, will be Indian IT companies’ plans to boost the revenue they receive from digital offerings. Accenture has said that half of its revenues now come to newer technologies and that 60% of its new bookings were for projects based on its digital offerings. It has also spent $1.7 billion in FY17 buying up companies that can boost it digital abilities. The investments appear to be paying off. Accenture said it is taking market share from its competitors.